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Dear Dr. Don,
How much money will I make in 28 days if I invest $10,000 in a 28-day Treasury bill at a 5 percent discount rate?
-- Michael Mint
 Dear
Michael,
It's called a discount rate because the interest earnings are discounted from the maturity value to arrive at the purchase price. That means the Treasury bill is worth $10,000 at maturity. You pay less than $10,000 for the bill when you buy it, and the difference is the interest income you make on the investment.
Investopedia has a Treasury
bill calculator that's a snap to use. Input
the days to maturity and the discount rate, and
you'll get back the approximate price of the Treasury
bill. I used it with your parameters and it gave
a price of 99.611. View this as a percentage of
the bill's maturity value, or 99.611 percent of
$10,000, for a price of $9,961.10. That's pretty
close to the true price of 99.616438 or $9,961.64.
Using the true price, you would make $38.36 in interest over the 28-day period on the $9,961.64 investment. The TreasuryDirect Web site provides the prices so you don't need a calculator to see the true price.
Trading costs are key in earning this yield. If your broker charges you $50 commission to buy the Treasury bill, your interest earnings are negative. Opening a TreasuryDirect account allows you to buy U.S. Treasury securities at the auction average price for the security with no commission and no account fees. There is a $45 fee to sell a security prior to its maturity, but you shouldn't confront that issue when investing in 28-day Treasury bills.
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